SRAX SRAX Inc

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(unaudited)

NOTE 1 – ORGANIZATION AND LIQUIDITY

Organization

SRAX, Inc. (“SRAX”, “we”, “us”, “our” or the “Company”) is a Delaware corporation formed on August 2, 2011. SRAX is headquartered in Westlake Village, California but operates as a distributed virtual Company. As of March 31, 2022, the unaudited Condensed Consolidated Financial Statements consist of SRAX and its wholly owned subsidiary LD Micro, Inc. (“LD Micro”).

SRAX is a technology firm focused on enhancing communications between public companies and their shareholders and investors. The Company currently has one reportable and operating segment, which consists of one reporting unit consisting of two distinct business units:

Each of SRAX’s business units deliver valuable insights that assist the Company’s clients with their investor relations and communications initiatives.

On February 4, 2021, the Company acquired FPVD through a reverse acquisition involving BIGtoken, Inc. On December 29, 2021, the Company deconsolidated the Company’s majority owned subsidiary BIG Token, Inc. (“BIGToken”) formerly known as Force Protection Video Equipment Corporation (or “FPVD”). See Note 3 –Discontinued Operations.

Liquidity and Capital Resources

The Company has incurred significant losses since its inception and has not demonstrated an ability to generate cash in excess of its operating expenses for a sustained period of time. As of March 31, 2022, the Company had cash and cash equivalents of $351,000 which is not sufficient to fund the Company’s planned operations through one year after the date the unaudited Condensed Consolidated Financial Statements are issued. These factors raise substantial doubt about the Company’s ability to continue as a going concern for at least one year after the date that the unaudited Condensed Consolidated Financial Statements are issued.

The unaudited Condensed Consolidated Financial Statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Accordingly, the unaudited Condensed Consolidated Financial Statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.

In making this assessment, the Company performed a comprehensive analysis of current circumstances including: its financial position, cash flow and cash usage forecasts, and obligations and debts. Although management has a long history of successful capital raises, the analysis used to determine the Company’s ability as a going concern does not include cash sources outside the Company’s direct control that management expects to be available within the next 12 months.

The Company expects that its existing cash and cash equivalents, accounts receivable and marketable securities as of March 31, 2022, will not be sufficient to enable it to fund the anticipated level of operations through one year from the date these financial statements are issued. The Company projects the sale of its marketable security holding will represent a substantial portion of the cash required for operations for the foreseeable future. The Company’s sales of marketable securities are primarily through sale transactions that qualify for exemptions pursuant to Rule 144 of the Securities Act of 1933. The conditions required to be met to qualify for the exemptions under Rule 144 are often difficult to predict, making it difficult to predict the timing of the associated cash flows from the sales of these securities. The Company’s holdings of marketable securities are subject to risks and uncertainties such as fluctuations in pricing in the primary market, and legal restrictions that create uncertainty around realization and timing of cash flows.

The Company anticipates raising additional capital through the private and public sales of its equity or debt securities and selling its marketable securities, or a combination thereof. Although management believes that such capital sources will be available, there can be no assurances that financing will be available when needed in order to allow the Company to continue its operations, or if available, on terms acceptable to it. If the Company does not raise sufficient capital in a timely manner, among other things, it may be forced to scale back its operations or cease operations altogether.

Uncertainty Due to Geopolitical Events

Due to Russia’s invasion of Ukraine, which began in February 2022, and the resulting sanctions and other actions against Russia and Belarus, there has been uncertainty and disruption in the global economy. Although the Russian war against Ukraine did not have a material adverse impact on the Company’s revenue or other financial results for the three months ended March 31, 2022, at this time the Company is unable to fully assess the aggregate impact the Russian war against Ukraine will have on its business due to various uncertainties, which include, but are not limited to, the duration of the war, the war’s effect on the economy, its impact to the businesses of the Company’s customers, and actions that may be taken by governmental authorities related to the war.

COVID-19 Update

The continuing COVID-19 global pandemic has caused significant disruption to the economy and financial markets globally, and the full extent of the potential impacts of COVID-19 are not yet known. Circumstances caused by the COVID-19 pandemic are complex, and uncertain. The impact of COVID-19 has not been significant to the Company’s results of operations, financial condition, and liquidity and capital resources. Although no material impairment or other effects have been identified to date, there is substantial uncertainty in the nature and degree of its continued effects over time. That uncertainty affects management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions as additional events and information become known. The Company will continue to consider the potential impact of the COVID-19 pandemic on its business operations.

NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying Condensed Consolidated Financial Statements and notes thereto are unaudited. The unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in the Company’s annual financial statements have been condensed or omitted. The December 31, 2021 Condensed Consolidated Balance Sheet was derived from financial statements but does not include all disclosures required by GAAP. These interim unaudited Condensed Consolidated Financial Statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim three-month periods ended March 31, 2022 and 2021. The results for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full year ending December 31, 2022 or for any future period.

These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2021, included in the Company’s annual report on Form 10-K filed with the SEC.

Principles of Consolidation

The unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The unaudited Condensed Consolidated Financial Statements have been prepared in conformity with GAAP and require management of the Company to make estimates and assumptions in the preparation of these unaudited Condensed Consolidated Financial Statements that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates and assumptions.

The most significant areas that require management judgment and which are susceptible to possible change in the near term include, among other items, the Company’s revenue recognition, valuation of marketable investment securities, stock-based compensation, income taxes, purchase price for acquisitions, goodwill, other intangible assets, and the valuation of redemption features and other assets and liabilities.

Fair Value of Financial Instruments

The accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific asset or liability.

In determining fair value, the Company uses various valuation techniques. A fair value hierarchy for inputs is used in measuring fair value. It maximizes observable inputs and minimizes unobservable inputs. Valuation techniques consistent with the market or income approach are used to measure fair value. The fair value hierarchy is categorized into three levels:

Fair value is a market-based measure that is based on assumptions of prices and inputs considered from the perspective of a market participant on the measurement date.

The availability of valuation techniques and observable inputs can vary from investment to investment and are affected by a wide variety of factors. The determination of fair value requires prudent judgment. Due to the inherent uncertainty of valuation, estimated values may be materially different from values were a ready market available. Inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the item being valued is classified based on the hierarchy category of the lowest significant level input to the fair value measurement. See Note 12 Fair Value of Financial Instruments.

Cash and Cash Equivalents

The Company considers all short-term highly liquid investments with a remaining maturity at the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents are recorded at cost, which approximates its fair value. The Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (“FDIC”) in accounts that at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. As of March 31, 2022 and December 31, 2021, the Company had $101,000 and $1,098,000 in excess of the federal insurance limit, respectively.

Marketable Securities

Marketable Securities consist of debt and equity securities. The Company accounts for marketable equity securities, including convertible preferred shares at fair value pursuant to ASC 321 Investments – Equity Securities, and marketable debt securities at fair value in accordance with ASC 320 – Investments Debt Securities. Marketable securities were approximately $28.8 million and $15.6 million as of March 31, 2022 and December 31, 2021, respectively.

Accounts Receivable

Credit is extended to customers based on an evaluation of their financial condition and other factors, and the Company usually does not require collateral. Management periodically assesses the Company’s accounts receivable and, if necessary, establishes an allowance for estimated uncollectible amounts. Accounts determined to be uncollectible are charged to operations when that determination is made. The allowance for doubtful accounts was approximately $157,000 and $130,000 as of March 31, 2022 and December 31, 2021, respectively.

Concentration of Credit and Significant Customer Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents and accounts receivable. Cash and cash equivalents are deposited with financial institutions within the United States. The balances maintained at these financial institutions are generally more than the FDIC insurance limits. The Company has not experienced any loss on these accounts.

As of March 31, 2022, the Company had 2 customers with an accounts receivable balance of approximately 43%. As of December 31, 2021, the Company had one customer with an accounts receivable balance of approximately 11%. Additionally, included within accounts receivables, the Company has a receivable of approximately $350,000 as of March 31, 2022 due from a prior subsidiary.

For the three months ended March 31, 2022 and 2021, the Company had no customers that account for a significant percentage of total revenues.

Goodwill and Intangible assets

Intangible assets consist of (i) goodwill, intellectual property, trademarks, trade names and non-compete agreements acquired in business combinations and capitalized software development costs. Other than goodwill and trademarks, intangible assets are stated at cost less accumulated amortization. Amortization is provided for on the straight-line basis over the estimated useful lives of the assets of five years.

Impairment of Goodwill, Intangible Assets and Other Long-lived Assets

Management evaluates the recoverability of the Company’s definitive lived intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists. Events and circumstances considered by the Company in determining whether the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include, but are not limited to: significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; a significant decline in the Company’s stock price for a sustained period of time; and changes in the Company’s business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Management evaluates the recoverability of the Company’s goodwill annually at December 31 or more often as events or circumstances indicate the fair value of a reporting unit is below its carrying value. The Company has determined that it operates as a single reporting unit for the purposes of conducting this goodwill impairment assessment. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that implied fair value of the goodwill within the reporting unit is less than its carrying value.

No impairments of goodwill or other long-lived assets have been recognized for the three months ended March 31, 2022 or 2021.

Revenue Recognition

The Company recognizes revenues upon the satisfaction of its performance obligation(s) (upon transfer of control of promised goods or services to its customers) in an amount that reflects the consideration to which it expects to be entitled to in exchange for those goods or services. The Company determines the amount of revenue to be recognized through the application of the five-step process as follows:

The Company has elected the following practical expedients allowed in accounting for its revenue recognition:

The Company generates revenue primarily from its Sequire SaaS platform and its LD Micro subsidiary. Specifically, the Sequire SaaS platform related revenue consists of (i) licensing subscriptions to access the platform, (ii) managed services involving data and marketing initiatives and (iii) ancillary data supplementing the use of the platform. LD Micro revenues consist of attendee fees and event sponsorship fees related investor conferences organized and hosted by the Company.

Sequire SaaS platform

Sequire SaaS platform agreements are typically for a period of 12-months and provide for monthly or annual payments in advance.

Many of the Sequire SaaS platform agreements provide customers the ability to pay for the services with the issuance of the customers’ securities including common stock. The amount of consideration for these contracts is based on the estimated fair value of the underlying securities on the contract date. See “Fair Value of Financial Instruments” for details over the calculation of fair value.

When Sequire SaaS platform contracts contain multiple performance obligations, transaction consideration is allocated to each individual performance obligation based on a relative Stand-Alone Selling Price (“SSP,”) basis. The Company determines SSP based on the price at which the performance obligation would be sold separately.

Subscription revenue is generally non-refundable regardless of the actual use and is recognized ratably over the non-cancellable contract term beginning on the commencement date of each contract, which is the date the Company’s service is first made available to customers.

Managed Services and Ancillary Data revenue is typically recognized using an output measure of progress by looking at the time elapsed as the contracts generally provide the customer equal benefit throughout the contract period because the Company transfers control evenly by providing a stand-ready service.

LD Micro - Conference Revenue

LD Micro agreements cover a specific event and provide for payment in advance or at the time of the event. Conference revenue from attendee fees and sponsorship fees is recognized at the time of the event (i.e., at a point-in-time).

Contract Receivables

Contracts receivable represents amounts for which non-cancellable revenue contracts with customers have been finalized but the payment in the form of securities issued by the customer have not been received by the Company.

Deferred Revenue

Deferred revenue resulting from amounts billed to, or cash received from, customers in advance of the Company satisfying its performance obligation and recognizing the applicable revenue.

Preferred stock

Preferred stock liability represents amounts payable to holders of the Preferred Stock Series A shares upon the eventual liquidation of assets designated for the sole purpose of paying dividends. Accordingly, the Company classified the Series A Preferred Shares as liability instruments because in-substance, they represent a right to the payment of dividends upon the liquidation of specified assets, are automatically returnable to the Company after the payments are made and feature no rights to further equity or residual interests in the Company.

Costs to Obtain or Costs to Fulfill a Contract

The Company has no costs that qualify as costs to obtain or costs to fulfill customer contracts.

Net Income (Loss) Per Share

Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding, after giving effect to all potentially dilutive common shares outstanding during the period. Dilutive shares associated with options and warrants there were in the money were computed using the treasury stock method and dilutive shares associated with convertible debt were computed using the if-converted method, which includes the effect of excluding the convertible debenture interest expense from net income.

Securities that could potentially dilute basic net income per share in the future that were not included in the computation of diluted net income per share were 1,770,885 and 11,867,520 during three months ended March 31, 2022 and March 31, 2021 respectively, because to do so would have been anti-dilutive

Basic and diluted earnings per share were calculated as follows:

Recent Accounting Pronouncements

In June 2022, the FASB issued Accounting Standards Update (“ASU”) ASU 2022-03 Fair Value Measurements, which clarifies the guidance in ASC 820 Fair Value Measurement (“ASC 820”), (1) when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with ASC 820. The adoption did not impact the Company’s financial position, results of operations or cash flows.

Recent Accounting Pronouncements Not Yet Adopted

In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-06, Debt-Debt with Conversion and Other Options which simplifies the accounting for convertible instruments by removing certain separation models (including the cash conversion model and the beneficial conversion feature model) for convertible instruments. As a result, for convertible instruments with conversion features that are not required to be accounted for as derivative instruments or that do not result in substantial premiums accounted for as paid-in capital, the embedded conversion features are no longer separated from the host contract. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, and convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost as long as no other features require bifurcation and recognition as derivatives. This guidance is effective on a modified retrospective or full retrospective basis for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company is currently evaluating the impact on the consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) addressing accounting for credit losses on financial instruments, which is designed to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. When determining such expected credit losses, the guidance requires companies to apply a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This guidance is effective on a modified retrospective basis for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact on the consolidated financial statements.

The Company’s management reviewed all recently issued ASU’s not yet adopted by the Company and does not believe the future adoptions of any such ASU’s may be expected to cause a material impact on the Company’s consolidated financial condition or the results of its operations.

NOTE 3 –DISCONTINUED OPERATIONS

Background

On February 4, 2021, the Company completed a share exchange agreement (“Exchange Agreement”) with FPVD. As part of the Exchange Agreement the Company transferred all of the BIGToken assets and 100% of the issued and outstanding shares of BIGToken for 149,562,566,534 shares of FPVD’s common stock and 5,000,000 shares of FPVD’s series A preferred stock. The Company accounted for the transaction as a reverse capitalization and resulted in reducing the Company’s ownership in BIGToken from 100% to 88.9% and establishment of a non-controlling interest. Subsequently, FPVD was renamed BIGToken.

Deconsolidation

On December 29, 2021, BIGToken (formerly FPVD) completed a merger transaction with BritePool, Inc. (“BritePool”) (the “Merger”) resulting in the Company’s ownership in BIGToken being reduced from 66% to approximately 4.99%. As a result of the Merger, BIGToken issued 183,445,351,631 shares of its common stock (“Acquisition Shares”) for all of the issued and outstanding equity shares of BritePool. On December 29, 2021, as a condition for the closing of the Merger, the Company exchanged 149,562,566,534 shares of BIGToken common stock for 242,078 shares of BIGToken’s Series D Convertible Preferred Stock (“Series D Stock”) (the “Exchange”). Simultaneously with the Exchange, the Company converted 22,162 shares of the Series D Stock into 13,692,304,136 shares of BIGToken’s common stock, or approximately 4.99% of the issued and outstanding shares of BIGToken’s common stock.

Subsequent to the transaction, the Company now owns 220,000 shares of BIGToken’s series D convertible, non-redeemable, non-voting preferred stock and 13,692,304,136 shares of its common stock. As a result of the transaction, the Company no longer has a controlling financial interest in BIGToken and deconsolidated BIGToken effective December 29, 2021, recognizing a loss of $10.7 million as follows:

The Company determined the Series D Stock would be classified as a Level 3 asset as there is no observable market for quoted market price for an identical asset. The Company engaged an independent third-party valuation expert to estimate the fair value of the Series D Stock.

The financial results of BIGToken are presented as loss from discontinued operations, net of income taxes on the Company’s unaudited Condensed Consolidated Statement of Operations for the three months ended March 31, 2021. The historical Condensed Consolidated Statement of Cash Flows has also been revised to reflect the effect of the deconsolidation. The following table presents the financial results of BIGToken:

NOTE 4 – SALE AND PURCHASE OF ACCOUNTS RECEIVABLE

Sales

In 2020, the Company entered into certain financing agreements providing for the sale, with full recourse, of certain of its accounts receivable. These transactions were accounted for as financing of accounts receivable and the related accounts receivable were not removed from the Company’s consolidated balance sheet at the time of the transaction; rather, a liability was recorded for the proceeds received. In 2020 subsequent to the transactions, the purchaser converted the payables into approximately $788,000 of the OID Convertible Notes payable (“Debentures”) (See Note 8 - OID Convertible notes payable).

For the year ended December 31, 2021, the Company entered into agreements with a third-party lender whereby it sold the Company’s right to future subscription revenues of $625,000 for net proceeds of $576,000. Under the terms of the agreement, the Company may borrow funds collateralized by the right to the revenues from Sequire platform contracts. The third-party lender receives a discount on the amount sold and remits the net amount to the Company. The Company bears the risk of credit loss on the contracts. These transactions are accounted for as secured borrowing arrangements and not as a sale of financial assets. During the three months ended March 31, 2022 the Company entered into agreements with third party lenders to borrow against future receipts in the amount of $2,164,000. The Company received net proceeds of $2,084,000, representing an aggregate OID of approximately 4%. These borrowings have terms of less than 12 months.

The amount of borrowings outstanding was approximately $3,786,000 and $631,000 as of March 31, 2022 and December 31, 2021, respectively, and are included in other current liabilities within our unaudited condensed consolidated balance sheets.

Purchase

Beginning in the fourth quarter of 2021 and through March 31, 2022, the Company purchased certain accounts receivable from its formerly consolidated subsidiary, BIGtoken providing for BIGtoken to sell, assign, transfer, convey and deliver to the Company all rights, title and interest for its receivable aggregating $914,000 for a purchase price of $857,000, representing a 6% discount. As of March 31, 2022 and December 31, 2021, the outstanding receivable amounts to $352,000, which was included in accounts receivables and collected subsequent to March 31, 2022.

NOTE 5 – MARKETABLE SECURITIES

The Company offers its customers the option to settle the contract price in the customer’s issued and publicly trading securities or securities convertible into publicly traded securities (e.g., convertible debt), which could be in the form of common stock, preferred stock or convertible debentures. The Company initially values the securities received at the fair market value on the date the contract is executed, which value is used for revenue recognition purposes. After receipt of the securities, the securities are accounted for as investments in debt and equity securities. The Company has concluded that all its debt securities should be classified as trading securities based on its intent to sell them in the near term. Debt securities classified as trading securities and the equity securities are measured at each reporting period at fair value with changes reported in earnings. Upon the sale of the securities, the Company recognizes the final realized gain or (loss) in the consolidated statement of operations as a component of net income (loss).

The following tables summarize the changes in the Company’s marketable securities during the three months ended March 31, 2022:

Three months ended March 31, 2022:

The Company’s sales of securities for the three months ended March 31, 2022, were approximately $1.3 million, with a book basis of approximately $2.3 million which represented a loss of approximately $1 million, which the Company recorded as other income included in the gains from marketable securities.

The equity securities may be accounted for and classified into two categories and accounted for as follows:

Concentration Risk

The Company’s holdings in marketable securities subject the Company to concentrations of market risks.

As of March 31, 2022, the Company’s top six marketable security positions had an aggregate fair value of $13.1 million, which represented 45% of the Company’s holdings. Excluding marketability and liquidity discounts, these positions had an aggregate value of $14.9 million as of March 31, 2022. As of November 30, 2022 these positions have an aggregate value, excluding marketability and liquidity discounts of $9.1 million, which represents a decrease of approximately 39% from March 31, 2022.

BIGtoken Investment

On February 15, 2022, the Company entered into a simple agreement for future equity (the “SAFE”) with its former BIGToken subsidiary. Pursuant to the SAFE, the Company invested $1,000,000 in the SAFE. The amount funded into the SAFE at a given time is referred to herein as the “SAFE Amount”. The Company is accounting for the SAFE as an equity investment carried at fair value with changes recorded in earnings each period and is reflected as such in the above table.

Pursuant to the terms of the SAFE, at any time that BIGtoken sells its securities (a “Financing”) prior to the termination of the SAFE, the Company may, at its option, convert the SAFE into: (i) the number of shares of non-voting Series D Convertible Preferred Stock (“Series D Preferred Stock”) equal to such (a) SAFE Amount divided by (b) the lowest price per share of equity securities sold in any Financing (prior to the termination of the SAFE) multiplied by eighty percent (80%) (the “Conversion Price”) and (ii) such number of warrants to purchase Series D Preferred Stock (the “Warrants”) equal to the SAFE Amount divided by the Conversion Price. Upon issuance, the Warrants will (i) have a term of five (5) years, (ii) an exercise price equal to the Conversion Price, and (iii) contain price protection provisions for subsequent financings.

NOTE 6 – DESIGNATED ASSETS FOR RETURN OF CAPITAL

On August 17, 2021, the Company announced that it will be issuing a one-time dividend consisting of a share of Series A Preferred Stock to shareholders, debenture holders, and certain warrant holders (“Recipients”) of record on September 20, 2021. The Board of Directors designated certain of the Company’s marketable equity securities (“Designated Assets”) as of September 20, 2021 to be used when liquidated, as a return of capital to the Recipients. See Note 9 - Series A Preferred Stock for more details.

The balance of designated assets consists of the following:

The activity in designated assets is as follows:

The Company’s sale of the designated marketable securities for the three months ended March 31, 2022, were approximately $268,000 with a cost basis of approximately $384,000 which resulted in a realized loss of $116,000, which the Company recorded as other expense included in the realized loss from designated assets.

NOTE 7 – NOTES RECEIVABLE

In October 2020, the Company entered into unit redemption agreements with two counterparties providing for the counterparties to repurchase from the Company units of the counterparty’s securities owned by the Company. Pursuant to the redemption agreements, the counterparties repurchased the units for a combined repurchase price of $8 million with $7 million being paid on closing and the additional $1 million being deferred and due on the earlier of the three-year anniversary or upon sale of the counterparties. The Company had no cost basis in the units and as a result the note receivable has no cost basis. The Company accounts for the note receivable as a loan pursuant to ASC 310 – Loans . The $1 million in deferred payments was recorded with an implied discount of approximately $107,000, which is being amortized over 3 years.

NOTE 8 – OID CONVERTIBLE NOTES PAYABLE

In June 2020, the Company entered into a definitive securities purchase agreement (the “Securities Purchase Agreement or Transaction”) with certain accredited and institutional investors (the “Purchasers”) for the purchase and sale of an aggregate of: (i) $16,101,000 in principal amount of Original Issue Discount Senior Secured Convertible Debenture (the “Debentures”) for $14,169,000 (representing a 12% original issue discount) (“Purchase Price”) and (ii) warrants to purchase up to 6,440,561 shares of the Company’s Class A common stock (the “Warrants”) in a private placement (the “Offering”). The Purchase Price consisted of (a) $13,000,000 in cash and (b) the cancellation of $1,169,000 in outstanding debt. The Company received net proceeds of approximately $9,100,000 after deducting the Placement Agent fees, the Debt Repayments and other offering expenses. The Company’s obligations under the Debentures are secured by substantially all of the assets of the Company.

The Debentures pay interest in cash at the rate of 12.0% per annum commencing on June 30, 2021, with such interest originally payable quarterly, beginning on October 1, 2021. Commencing after the six-month anniversary of the issuance of the Debentures, the Company was required to make amortization payments (“Amortization Payments”) with each Purchaser having the right to delay such Amortization Payments by a six-month period up to three separate times (each, an “Extension”) in exchange for five percent (5%) in principal being added to the balance of such applicable Debenture on each such Extension. The Debentures had an original maturity date of December 31, 2021 but were extended three times and now mature on June 30, 2023. Beginning on the date that the first Amortization Payment is due, and on a monthly basis thereafter, the Company will be required to pay one hundred fifteen percent of the value of one-twelfth of the outstanding principal plus any additional accrued interest due.

The Debentures are convertible at the option of the holder into shares of the Company’s common stock at an initial conversion price of $2.69 per share, subject to adjustment in the event of (i) stock splits and dividends, (ii) subsequent rights offerings, (iii) pro-rata distributions, and (iv) certain fundamental transactions, including but not limited to the sale of the Company, business combinations, and reorganizations.

In the event a Purchaser converts a portion of its Debenture into shares of the Company’s Common Stock, such amount will be deducted from the next applicable Amortization Payment. In the event such conversion exceeds the next applicable Amortization Payment, such excess amount will be deducted, in reverse order, from future Amortization Payments.

Pursuant to the terms of the Debentures and Warrants, a Purchaser will not have the right to convert any portion of the Debentures or exercise any portion of the Warrants if the holder (together with its affiliates) would beneficially own in excess of 4.99% or 9.99% (at the Purchaser’s option) of the number of shares of Common Stock outstanding immediately after giving effect to such conversion or exercise, as such percentage ownership is determined in accordance with the terms of the Debentures and the Warrants; provided that at the election of a holder and notice to us such percentage ownership limitation may be increased to 9.99%; provided that any increase will not be effective until the 61st day after such notice is delivered from the holder to the Company.

Subject to the Company’s compliance with certain conditions, upon ten trading days’ notice to the Purchasers, the Company has the right to redeem the Debentures in cash at 115% of their outstanding principal, plus accrued interest. Additionally, in the event that the Company (i) sells or reprices any securities (each, a “Redemption Financing”), or (ii) disposes of assets (except those sold or transferred in the ordinary course of business) (each, an “Asset Sale”), then the Purchasers shall have the right to (a) in the event of a Redemption Financing at a price per Common Stock equivalent of $2.50 or less per share, the Purchasers may mandate that 100% of the proceeds be used to redeem the Debentures (b) in the event of a Redemption Financing at a price per Common Stock equivalent of greater than $2.50 per share, the Purchasers may mandate that up to 50% of the proceeds be used to redeem the Debentures, and (c) in the event of an Asset Sale, the Purchasers may mandate that up to 100% of the proceeds be used to redeem the Debentures.

The Debentures also contain certain customary events of default provisions, including, but not limited to, payment default, breaches of covenants, the occurrence of an event of default under certain material contracts of the Company, failure to register the shares underlying the Debentures and Warrants, changes in control of the Company, delisting of its securities from its trading market, and the entering or filing of certain monetary judgments against the Company. Upon the occurrence of any such event of default, the outstanding principal amount of the Debenture plus liquidated damages, interest and other amounts owing in respect thereof through the date of acceleration, shall become, at the Purchaser’s election, immediately due and payable in cash. The Company is also prohibited from certain activities (unless waived by 67% of the then outstanding Purchasers, and including the lead Purchaser), including but not limited to, the creation of certain debt obligations, liens on Company assets, amending its charter documents, repayment or repurchase of securities or certain debt of the Company, or the payment of dividends.

The Warrants are initially exercisable at $2.50 per share and, are subject to cashless exercise after six months if the shares underlying the Warrants are not subject to an effective resale registration statement. The Warrants are also subject to adjustment in the event of (i) stock splits and dividends, (ii) subsequent rights offerings, (iii) pro-rata distributions, and (iv) certain fundamental transactions, including but not limited to the sale of the Company, business combinations, and reorganizations.

Pursuant to a registration rights agreement (“Registration Rights Agreement”), the Company has agreed to file a registration statement registering the resale of the shares of the common stock underlying the Debentures and the Warrants within forty-five days from the date of the Registration Rights Agreement. The Company also agrees to have the registration statement declared effective within 90 days from the date of the Registration Rights Agreement and keep the registration statement continuously effective until the earlier of (i) the date after which all of the securities to be registered thereunder have been sold, or (ii) the date on which all the securities to be registered thereunder may be sold without volume or manner-of-sale restrictions and without current public information pursuant to Rule 144 under the Securities Act. The Company is also obligated to pay the Investors, as partial liquidated damages, a fee of 2.0% of each Purchaser’s subscription amount per month in cash upon the occurrence of certain events, including the Company’s failure to file and/or have the registration statement declared effective within the time periods provided. As of March 31, 2022, the Company has continuously met its obligations under the Registration Rights Agreement.

Bradley Woods & Co. Ltd. (“Placement Agent”) acted as the placement agent, in connection with the sale of the securities. Pursuant to an engagement agreement, the Company agreed to pay the Placement Agent a cash commission of $1,040,000 and issue an aggregate of 478,854 Common Stock purchase warrants (“PA Warrants”). The PA Warrants are substantially similar to the Warrants, except that the PA Warrants have an exercise price of $3.3625 per share. Additionally, upon the exercise of the Warrants issued in the Offering, the Placement Agent will be entitled to eight percent (8%) of the cash proceeds received from such exercises. The fair value of the PA Warrants at issuance was estimated to be $360,000.

The Company first allocated the cash proceeds to the loan and the equity classified warrants on a relative fair value basis, secondly, the proceeds were allocated to the beneficial conversion feature. The proceeds allocated to the warrants and the beneficial conversion feature resulted in a debt discount being amortized as additional interest expense using the effective interest method over the term.

The table below summarizes the Debenture related activity during the three months ended March 31, 2022:

As of March 31, 2022 and December 31, 2021, the Company has classified the debt as current liability because management intends to redeem the remaining convertible debentures within the following 12 months.

NOTE 9 – COMMON AND PREFERRED STOCK

Common Stock

The Company’s certificate of incorporation provides for two classes of common stock: Class A common stock (authorized 250,000,000 shares, par value $0.001), which has one vote per share, and Class B common stock (authorized 9,000,000 shares, par value $0.001), which has ten votes per share. Any holder of Class B common stock may convert his or her shares at any time into shares of Class A common stock on a share-for-share basis. Otherwise, the rights of the two classes of common stock are identical.

In August 2021, the Board of Directors approved a share repurchase program pursuant to which the Company is authorized to repurchase up to $10,000,000 of Class A Common Stock in privately negotiated transactions or in the open market at prices per share not exceeding the then-current market prices. Under the program, management has discretion to determine the dollar amount of shares to be repurchased and the timing of any repurchases in compliance with applicable law and regulation. This includes purchases pursuant to Rule 10b5-1 plans, including accelerated share repurchases. The program does not have an expiration date.

During the year ended December 31, 2021, the Company repurchased 155,000 shares of Common Stock, for an aggregate purchase price of $793,000 pursuant to the Company’s Share Buy-Back program. The shares were retired as of December 31, 2021. No amounts were repurchased in the three months ended March 31, 2022. The total remaining authorization for future common share repurchases under the Company’s share repurchase program was $9.2 million as of March 31, 2022.

During the year ended December 31, 2021, the Company sold 53,616 shares of common stock, resulting in proceeds of approximately $284,000, through sales under its At the Market (ATM) offering.

Preferred Stock

The Company is authorized to issue 50,000,000 of preferred stock, par value $0.001, of which 36,462,417 shares are designated as Series A Preferred Stock (“Dividend Shares”). The Company’s Board of Directors, without further stockholder approval, may issue preferred stock in one or more series from time to time and fix or alter the designations, relative rights, priorities, preferences, qualifications, limitations and restrictions of the shares of each series. The rights, preferences, limitations and restrictions of different series of preferred stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and other matters. The Board of Directors may authorize the issuance of preferred stock, which ranks senior to the Company’s common stock for the payment of dividends and the distribution of assets on liquidation. In addition, the Board of Directors can fix limitations and restrictions, if any, upon the payment of dividends on both classes of the Company’s common stock to be effective while any shares of preferred stock are outstanding.

On September 20, 2021, the Company filed a certificate of designation (the “COD”) of preferences, rights, and limitations of Series A Non-Voting Preferred Stock (“Series A Preferred Stock”) with the Secretary of State of Delaware. Pursuant to the COD, the Company is authorized to issue up to 36,462,417 shares of Series A Preferred Stock (the “Dividend Shares”).

On September 27, 2021, the Company issued a one-time dividend of 36,462,417 shares of series A preferred stock (“Preferred Stock”) to certain Qualified Recipients (the “Dividend”) which is convertible into shares of common stock on a 1 for 1 basis. The preferred stock entitles the Qualified Recipients with the right to receive the net proceeds from sales of certain marketable securities that the Company received through its Sequire Platform services. See Note 6 – Designated Assets for Return of Capital.

As of the Record Date, the following holders of securities were entitled to receive the Dividend (collectively, the “Qualified Recipients):

The Company’s management has evaluated the Preferred Stock and determined that Preferred Stock is mandatorily redeemable upon the distribution of the net proceeds from the sale of the designated marketable securities. Accordingly, it is classified as a liability recorded at fair value, with changes in fair value being reflected in earnings.

NOTE 10 – EQUITY COMPENSATION PLANS AND WARRANTS

Equity Compensation Plans

As of March 31, 2022, the Company has approximately 228,000 shares of Class A Common Stock reserved for issuance under the Company’s equity compensation plans.

In the three months ended March 31, 2022, the Company issued the below shares and granted the following stock-based awards:

On January 2, 2022, Michael Malone, our Chief Financial Officer exercised an option to purchase 100,000 shares of our common stock that was issued on December 15, 2018. The option was exercised on a cashless basis and included 57,016 shares withheld pursuant to the cashless exercise and an additional 16,732 shares withheld for tax withholding. Accordingly, we issued Mr. Malone 26,252 shares of common stock.

On January 3, 2022, we issued four (4) common stock purchase options to our non-employee directors, pursuant to our amended non-employee director compensation policy. Each option entitled the holder to purchase 29,533 shares of common stock at an exercise price of $4.35 per share, for an aggregate exercise amount of $128,500. The options vest in equal quarterly over a one (1) year period from the issuance date. The options expire on the seven (7) year anniversary of the issuance date. Each option has a Black-Scholes value of $100,000.

During the month of January 2022, non-executive employees exercised a total of 227,667 stock options. These options were exercised on a cashless basis, and included 161,938 shares withheld pursuant to cashless exercise and tax withholdings. This resulted in the issuance of 65,729 shares of common stock.

On January 6, 2022, we issued non-executive employees, options to purchase 380,000 shares of Class A common stock. The option has an exercise price of $4.25 per share, a term of five (5) years and vests in equal quarterly installments over a three (3) year period from the grant date. The option had a Black-Scholes value on the grant date of $1,153,000.

On January 6, 2022, we issued Christopher Miglino, our Chief Executive Officer, an option to purchase 120,000 shares of common stock. The option has an exercise price of $4.25 per share, a term of seven (7) years and vests in equal quarterly installments over a three (3) year period from the grant date. The option had a Black-Scholes value on the grant date of $397,000.

On January 6, 2022, we issued an employee an option to purchase 100,000 shares of common stock. The option has an exercise price of $4.25 per share, a term of seven (7) years and vests in equal quarterly installments over a three (3) year period from the grant date. The option had a Black-Scholes value on the grant date of $331,000.

On January 6, 2022, we issued Michael Malone, our Chief Financial Officer, a conditional option to purchase 100,000 shares of Class A common stock. The option is a conditional grant, subject to shareholder approval. Assuming approval by the shareholders, the option has an exercise price of $4.25 per share, a term of seven (7) years and vests in equal quarterly installments over a three (3) year period from the grant date. The option had a Black-Scholes value on the grant date of $331,000.

On January 6, 2022, we issued an employee an option to purchase an aggregate of 20,000 shares of common stock. The option is a conditional grant, subject to shareholder approval. The option has an exercise price of $4.25 per share, a term of five (5) years, and vest in equal quarterly installments over a three (3) year period from the grant date. The option had a Black-Scholes value on the grant date of $61,000.

The per-share fair value of each stock option with service conditions only granted during the quarter ended March 31, 2022 was determined on the grant date using the Black-Scholes option pricing model with the following assumptions:

The following table details provides a summary of the Company’s stock option activity for the three months ended March 31, 2022:

The Company did not issue any stock-based awards in the three months ended March 31, 2021.

During the three months ended March 31, 2022 and 2021, the Company recorded stock-based compensation expense of $358,000 and $253,000, respectively with such costs being included in Employee related costs on our unaudited Condensed Consolidated Statements of Operations. At March 31, 2022, there was $2,572,000 of unrecognized compensation expense expected to be recognized over the next 2.75 years on average.

Warrants

During the three months ended March 31, 2022, the Company did not have any activity with warrants.

On February 21, 2021 the Company entered into an agreement with the Debenture holders to exercise 4,544,440 of the Warrants. In consideration for the Debenture holders to exercise the Warrants, the Debenture holders would receive a new registered warrant (“New Warrant”) to purchase an aggregate of 4,545,440 shares of the Company’s common stock at an exercise price of $7.50 per share expiring on January 31, 2022. Each investor agreed to pay $0.125 for each New Warrant. The net proceeds received of approximately $11,022,000 consisted of the exercise price of $11,363,000, $568,000 for the purchase of the New Warrant less solicitation fees of approximately $909,000.

The New Warrants were valued using the Black Scholes option pricing model at a total of $7,737,000 based on a one-year term, implied volatility of 96%, a risk-free equivalent yield of 11%, and stock price of $5.83. The fair value of the New Warrants was expensed and included in Financing Costs for the three months ended March 31, 2021.

Additionally during the three months ended March 31, 2021, there were an additional 28,566 warrants exercised.

During the three months ended March 31, 2021, other warrant holders exercised warrants to purchase 399,880 shares for approximately $1,200,000.

At March 31, 2022, the Company had the following outstanding and exercisable warrants:

NOTE 11 – REVENUE

The Company has two business units, one operating segment, one reportable segment and one reporting unit. The Sequire segment includes the licensing of the Company’s proprietary SaaS platform and associated data analysis technologies, consumer and investor targeted marketing solutions to allow users of the Company’s SaaS platform to act on the insights obtained through the Company’s technologies, and LD Micro, which is in the business of hosting events and conference for microcap public companies.

The following table summarizes revenue by revenue stream for the three months ended March 31:

The following table summarizes revenue recognized in exchange for customer securities and cash for the three months ended March 31:

As of March 31, 2022 and December 31, 2021, contract liabilities representing deferred revenue were approximately $16.7 million and $12.9 million, respectively. Revenue recognized from the balances of deferred revenue was $6.4 million and $3.5 million for the three months ended March 31, 2022 and 2021, respectively.

As of March 31, 2022 and December 31, 2021, contracts receivable amounted to $1,460,000 and $844,000, respectively.

NOTE 12 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of certain financial instruments, including cash and cash equivalents and accounts payable and accrued expenses, approximate their respective fair values due to the short-term nature of such instruments.

The carrying amount of our debt and notes receivable approximate their fair value.

Valuation of Marketable Securities

An integral part of the Company’s fair value measurement process is the assessment of the type of securities as well as the securities’ liquidity and marketability. Warrants are initially valued at cost, if acquired for cash, or at intrinsic value. Convertible debt is valued based on an analysis of the implied call option and a discounted cash flow analysis of the debt component. Equity securities are valued using the quoted prices times the number of shares acquired. The securities are then evaluated based on their marketability (usually based on the restrictions on resale into the securities primary market) and liquidity.

Investments in restricted securities of public companies cannot be offered for sale to the public until the company complies with certain statutory requirements. Investments in restricted securities of public companies are generally categorized in Level 2 of the fair value hierarchy. However, investments in public companies may be categorized in Level 3 of the fair value hierarchy depending on the level of observable liquidity. Specifically, if the Company determines the market activity is not sufficient to conclude the market activity represents an Active Market.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. This determination requires significant judgments to be made. The Company considers marketable securities without sufficient liquidity to sell within 6 months of the date of acquisition and securities that will not be eligible for resale in the public markets through Rule 144 for 1 year from the date acquisition to be valued with Level 2 inputs.

The contract assets represent a forward contractual right to receive securities pursuant to a revenue contract. As of March 31, 2022 and December 31, 2021, the Company determined the value of the securities underlying the contract asset to have a fair value of $1,460,000 and $844,000, respectively. Contract assets within level 3 at December 31, 2021 were received during the three months ended March 31, 2022, and are now included within marketable securities. Contract assets as of March 31, 2022 relate to new contracts for which securities have not been received.

The Company had the following financial assets at March 31, 2022 and December 31, 2021:

Changes in Level 3 assets measured at fair value

The following table presents additional information about Level 3 assets measured at fair value. Both observable and unobservable inputs may be used to determine the fair value of assets classified within the Level 3 category. As a result, the unrealized gains and losses for the assets and liabilities within the Level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs. Transfers to/from Levels 1, 2 and 3 are recognized at the beginning of the reporting period in which a change in valuation technique or methodology occurs. Changes in Level 3 assets measured at fair value the three months ended March 31, 2022, were as follows:

The Company had no Level 3 assets or liabilities in the three months ended March 31, 2021.

Valuation processes for Level 2 and 3 Fair Value Measurements

Fair value measurement of certain of our marketable securities fall within Level 2 and 3 of the fair value hierarchy. The fair value measurements are evaluated by management to ensure that changes are consistent with expectations of management based upon the sensitivity and nature of the inputs.

The Company classifies certain assets as Level 3 assets if the estimated fair value was derived from level 3 inputs. The Company utilizes a put option pricing model to arrive at a discount for lack of marketability and liquidity associated with restrictions on sales into the public market. The Company generally classifies restricted securities in public companies as level 2, however in circumstances where the observed level of liquidity is low and the quoted market price is deemed unreliable they may be categorized in Level 3 of the fair value hierarchy. The Company considers marketable securities without sufficient liquidity to sell within 6 months of the date of acquisition and securities that will not be eligible for resale in the public markets through Rule 144 for 1 year from the date acquisition to be valued with Level 2 inputs.

The fair value of the Company’s Series A Preferred Stock may change significantly, impacting the Company’s assumptions used to estimate its fair value. The valuation of the Series A Preferred Stock is primarily based on the valuation of its underlying marketable securities. The marketable securities that are underlying the Series A Preferred Stock are classified as Designated Assets on the Company’s balance sheet and include Level 1 and Level 2 marketable securities and cash.

The following table lists the significant unobservable inputs used to value assets classified as Level 3 of March 31, 2022. The table is not intended to be all-inclusive, but instead identifies the significant unobservable inputs relevant to the determination of fair values. The other Level 3 assets have been valued using unadjusted third-party transactions and, unadjusted historical third-party information, or the unadjusted net asset values of the securities’ issuer. No unobservable inputs internally developed by the Company have been applied to these assets, and therefore are omitted from the following table.

Sensitivity of Level 3 measurements to changes in significant unobservable inputs

The process of estimating the fair value of securities without active markets involves significant estimates and judgement on behalf of management. These estimated fair values may not be realized in a current sale or immediate settlement of the asset or liability. Additionally, there are inherent uncertainties in any fair value measurement techniques, and changes in the underlying assumptions used could significantly affect the fair value measurement amounts.

Changes in each of these significant unobservable valuation inputs will impact the fair value measurement of the financial instrument generally as follows:

Instruments for which unobservable inputs are significant to their fair value measurement (i.e., Level 3) include securities in which we deem their market to be inactive or unreliable. The Company reviews and updates the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next that are related to the observable inputs to a fair value measurement may result in a reclassification from one hierarchy level to another.

NOTE 13 – RELATED PARTY TRANSACTIONS

The Company has entered into an agreement providing access to a suite at the Sofi Stadium in Los Angeles from an entity wholly owned by Christopher Miglino, our CEO. The agreement entitles the Company to game tickets, optional tickets for other stadium events, and suite and conference room access during business days. In May of 2022, the Company renewed the agreement for four (4) additional National Football League seasons for an average rate per year of approximately $497,000. The amount charged to the Company is a pass-through of the actual expenses charged by the stadium to the related party, without markup. The agreement terminates in February 2026.